China banning bitcoin annually is a joke. The famously central Chinese state may be hesitant to accept a decentralized, uncontrolled tool of monetary sovereignty. This is especially true at a time where the CCP has begun to roll out the much-hyped “digital Yuan”. However, most headlines about Chinese bitcoin bans were exaggerated and an opportunity to grab some cheap coins.
The joke proved to be more accurate than usual in 2021. China did indeed crack down on Bitcoin in large numbers, with particular emphasis on mining.
The network is powered by bitcoin mining. For the chance of earning new bitcoins and computing power, miners provide their services. This is a lotto. There is a greater chance that you will “win” if you buy more tickets and/or donate more computing power.
Imagine what it would look like if lottery players had access to tickets that were cheaper than the rest. For a long period, this was China’s situation. It is the reason why 70% of global hashrate or total processing power – roughly 70 percent – had moved to China by 2020. Mining climates that were more favorable to miners (hot-running mining machinery works best in the cooler air of Xinjiang), and less stringent environmental regulations helped to subsidize them. LiterallyThe Chinese government subsidized them.
The problem with Bitcoin critics was the high concentration of Chinese mining. There was a risk that mining could be adversely influenced by that not-exactly-libertarian government. It would demand network changes. Where else could it move if mining in China were shut down? The network would be in chaos. What about other cryptocurrency whose mining methods are less efficient? The happy ending to this story is.
In Inner Mongolia, which was home to around 8% of bitcoin’s havehrate at that time, the bans began. Regional Development and Reform Commission placed a ban on Bitcoin mining and allowed operators to leave within two months. To receive tips on remaining miners, a hotline was established.
Similar bans and restrictions emanated from other hotbeds of mining activity—Xinjiang, Qinghai, Yunnan, and the holy hydropower grail of Sichuan all fell like dominoes.
In May it was clearer that something was wrong. The Financial Stability and Development Committee, which is the highest financial regulator in the State Council’s system, released a statement promising “resolutely to prevent and control financial hazards,” and also a “crackdown on bitcoin mining.” While some regions might have shut down mining operations due to energy concerns, the CCP sees bitcoin mining as a serious threat to its control over the Chinese economy.
It was obviously bad news both for Chinese users and miners of bitcoin. Temporarily, it was chaotic also for the bitcoin network.
Every ten minutes, the network checks the total hashrate and adjusts “difficulty”, or the likelihood of you winning a lottery ticket. This depends on whether there are more or less computers online. If there is less computing power—fewer people buying lottery tickets—it gets a little easier to win new bitcoins. It becomes more difficult if there are more people buying lottery tickets. This is a good way to calibrate network in the face of temporary fluctuations.
The network can also be calibrated in shocks such as those we experienced in China. Humans are another matter. Bitcoin transactions are not adjusted automatically every ten minutes by the network users. The network is still active and they continue to trade as though nothing has happened. Because the network is congested this means that transactions take longer to process or people need to pay more fees. Bitcoin needs to be able to build new mining infrastructure quickly.
Contrary to what some people believe, there was no crash. There wasn’t a second cryptocurrency that took off. The Chinese government didn’t take over the bitcoin project. They flocked to other places.
Bitcoin is strong. Chinese mining companies began to pack up their ASICs almost immediately and look for better climes. Time is really money for bitcoin miners. Every hour that their costly hardware is offline, they lose bitcoins for capital cost recovery and profit.
Bitcoin miners required a safe, secure new home. They needed it quickly. Texas was a warm and welcoming state. Not only does Texas house a bustling cryptocurrency scene in Austin, power is cheap and abundant—two things that miners love. Additionally, Texas has made efforts to promote the growth of cryptocurrency in the state by passing pro-Bitcoin laws.
The United States holds 35 percent of global bitcoin hashrate and is currently the leader in Bitcoin mining. The runners up are Russia (11 percent) and China’s neighbor Kazakhstan (18 percent)—the latter absorbed many of the runaway Chinese miners in the wake of the CCP ban. At the moment Kazakhstan is experiencing its own civil unrest, and we might see more miners moving to Russia, or even further afield like the United States.
It isn’t to suggest that China doesn’t have mining. Unlawful bitcoin miners are still operating in Sichuan. They try to get some cash and avoid being caught. Although there aren’t any official numbers, some estimates suggest that bitcoin bootleggers could make up around a dozen percent of hashrate. It remains to be determined how sustainable this secret practice will remain.
For bitcoin and the United States, the Chinese ban on mining bitcoin was a huge win. It was not disrupted by a half-hashrate shock. It was quickly recalibrated and relocated in other areas that were more suitable. The same dynamic has been observed in Kazakhstan so seasoned users of bitcoin don’t have to worry about disruptions. The uptime of bitcoin is excellent.
America’s great opportunity is the 2021 mining migration.
Common criticism is that Bitcoin is bad for the environment. China has used the same excuse for banning Bitcoin. Let’s side aside the facts that spending energy on good things (like secure sovereign money) is … good, and that we “waste” more energy on things like Netflix alone without blinking an eye. Bitcoin is an economic incentive for miners to keep energy costs as low as they can. This encourages parsimony.
Bitcoin miners may be the most efficient technology to use energy. They aim to get as little energy cost as possible. One cool innovation: natural gas flare harvesting. Natural gas industries must burn excess natural gas to the atmosphere because they don’t have any other options. In order to convert the wasted energy into Bitcoins, bitcoin miners formed partnerships with natural gas companies. This is a great example of how Bitcoin mining can promote better energy usage and environmentally friendly practices.
We have the opportunity to create a solid mining industry here in America if we can overlook the energy and bitcoin misinformation. Not only would this create a new industry, but it will also allow us to devise more efficient energy practices.
The only thing we have to lose is this manna. Mining will move to better locations if the US fails bitcoin mining like China. The bottom line is that when it comes to mining, the bitcoin network is resilient and consistent—exactly what you want in a decentralized global store of value.